MW Bond funds back in demand as fading recession fears spark rally in riskier debt

By Christine Idzelis

'The positive turn unwinds some of the sharp outflows in early April' from bond mutual funds and ETFs, according to Barclays

Strong investor demand for U.S. bond funds returned last week, in sharp contrast to outflows seen over the past month as investors grappled with uncertainty surrounding President Donald Trump's April 2 tariffs.

"The positive turn unwinds some of the sharp outflows in early April," Barclays analysts said in a research note Monday. Exchange-traded funds and mutual funds that invest in fixed income attracted $10.7 billion of inflows over the five days through May 8, compared with the prior four-week average of $6.6 billion in outflows, the analysts said.

"Most fund types had inflows, and long-term funds fared particularly well," the analysts found.

Treasury yields were rising Monday as investors weighed the positive outcome of trade talks between the U.S. and China over the weekend. The discussions led to substantially lower tariffs for a period of 90 days, a temporary agreement that marked a major de-escalation in trade tensions between the world's two largest economies.

Bond yields were up Monday "as fears that a trade war will cause a recession continue to recede," following U.S. Treasury Secretary Scott Bessent's negotiations with Chinese trade officials over the weekend, Yardeni Research said in a note emailed Monday.

Since April 2, the day Trump announced a sweeping set of so-called reciprocal tariffs, bond-focused ETFs and mutual funds have seen net outflows of $11 billion, the Barclays note shows. That's after the return to "strong demand" for bond funds last week, the analysts found.

"The breakdown of flows over the five days through May 8 as a percentile over the prior six months for various fund types shows that mixed intermediate term and total return bond funds had the weakest demand," they wrote, "while mortgage-backed, long-term corporate, and intermediate-term corporate bond funds had the strongest demand."

The Vanguard Total Bond Market ETF BND, which tracks the U.S. investment-grade fixed-income market including Treasurys, mortgage-backed securities and corporate bonds, has seen a total return of almost 2% so far this year, based on Monday afternoon trading levels.

Among long-term interest rates, the yield on the 10-year Treasury note BX:TMUBMUSD10Y rose 8 basis points Monday to 4.454%, according to Dow Jones Market Data. As for shorter-term rates, the 2-year Treasury yield BX:TMUBMUSD02Y jumped 11.7 basis points to 3.999%.

"Banks were again strong buyers of fixed income over the week with holdings having risen" by about $30 billion, with their portfolios indicating a rise in holdings of Treasurys and mortgage-backed securities, the Barclays analysts said. "We estimate that likely over half of the rise was market to market gains."

Investor optimism had been building in recent weeks that the White House would negotiate trade deals that result in a reduction of the tariffs announced April 2. All eyes were on China in particular, because it is a major U.S. trading partner and because the levies on imported Chinese goods were raised so high in the trade war as to spark recession fears.

Looking at U.S.-listed bond ETFs in April, State Street Global Advisors found that flows were "muted," according to a note from the firm's head of Americas ETF research, Matthew Bartolini.

"Without the massive inflows into short-term government exposures, the government category and broader category both would have had outflows," he said in the note. The category of credit, which includes ETFs targeting investment-grade and high-yield corporate bonds, saw record monthly outflows in April as investors shunned riskier assets in the fixed-income market, his research found.

ETFs that invest in high-yield bonds, a form of corporate credit known as junk as it's rated below investment grade, were rising sharply on Monday afternoon. For example, the SPDR Bloomberg High-Yield Bond ETF JNK was up 1.1% , according to FactSet data, at last check.

-Christine Idzelis

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May 12, 2025 16:04 ET (20:04 GMT)

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